Sumitomo Mitsui on Pace for Record Profit on Stock Rally

Sumitomo Mitsui Financial Group Inc., Japan’s second-largest bank by market value, is on pace to post record annual profit after a stock-market rally fueled third-quarter earnings growth that beat estimates. Shares rose.

Net income more than doubled to 219.4 billion yen ($2.4 billion) in the three months ended Dec. 31 from 97.2 billion yen a year earlier, company figures showed yesterday. Nine-month profit climbed 34 percent to 550.4 billion yen, approaching the record 686.8 billion yen reached for the year ended March 2006.

Prime Minister Shinzo Abe’s pledge to stimulate the economy has fueled the Nikkei 225 Stock Average’s surge to the highest level since April 2010, helping to ease losses tied to Sumitomo Mitsui’s equity holdings. Signs of a lending recovery are emerging in Japan, with loans by city banks climbing for the first time in three years in December.

“Sumitomo Mitsui will probably break their all-time annual profit this year given the improved business environment surrounding the megabanks,” said Toyoki Sameshima, a Tokyo-based analyst at BNP Paribas SA, who predicts the bank’s profit this quarter at about 190 billion yen. “Funding demand seems to be picking up from medium-sized companies in Japan.”

Shares of Sumitomo Mitsui rose as much as 5.4 percent in Tokyo trading, the biggest intraday gain since Oct. 27, 2011, and traded at 3,630 yen as of 9:53 a.m., the highest in more than three years.

Estimates Beat

Third-quarter profit exceeded the 152.3 billion yen average estimate of eight analysts surveyed by Bloomberg. The results were calculated by subtracting first-half profit from nine-month figures reported in a statement to the Tokyo Stock Exchange.

Lending income gained 9.1 percent in the quarter from a year earlier to 355.8 billion yen, according to the calculations. Fees and commissions income rose 13.7 percent to 224.9 billion yen, and profit from trading government bonds and other securities more than doubled to 107.4 billion yen.

The stock has surged 48 percent over the past three months and the Nikkei 225 has jumped 24 percent as Abe’s Liberal Democratic Party won an election on a campaign to end deflation with fiscal and monetary stimulus.

Brokerage Rebound

Sumitomo Mitsui’s losses from shareholdings totaled 67.3 billion yen in the nine months, easing from 132.9 billion yen in the six months through Sept. 30. The losses still doubled from 33.1 billion yen a year earlier, the statement showed.

The stock rally fueled earnings at the bank’s brokerage unit. SMBC Nikko Securities Inc. yesterday posted net income of 12.2 billion yen for the quarter, rebounding from a loss of 1.6 billion yen a year earlier. Fees from sales of mutual funds and other investment products more than doubled to 16.8 billion yen.

The nine-month net income of 550.4 billion yen exceeded the bank’s full-year forecast for 540 billion yen profit. The holding company, now led by President Koichi Miyata, was formed in 2002 following a merger.

Mizuho Financial Group Inc., the country’s third-biggest bank by market value, is scheduled to release earnings today, and Mitsubishi UFJ Financial Group Inc., the largest, will report tomorrow.

Loans outstanding at Japan’s city banks rose 0.3 percent in December, the first increase since October 2009, according to central bank data. Overall lending including by regional banks increased 1.4 percent.

Still, the resurgence in borrowing won’t be strong enough to improve banks’ profit margins from loans as long as the Bank of Japan eases monetary policy and keeps benchmark rates near zero, said Natsumu Tsujino, an analyst at JPMorgan Chase & Co.

“It’ll take time before local loan requirements substantially grow as the economy expands on the back of the government’s stimulus measures,” Tokyo-based Tsujino said.

Japanese lenders have the lowest loan profitability in Asia. The average net interest margin at the 85 companies on the Topix Banks Index is 1.3 percent, according to data compiled by Bloomberg based on their latest filings. That compares with 2 percent at Singapore’s three biggest banks and 2.1 percent for the four so-called pillar lenders in Australia.

Net interest margin at Sumitomo Mitsui stood at 1.18 percent as of Sept. 30, the data show.

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